Note: The Department's positions on mandatory maintenance contracts and maintenance contracts related to software have been unchanged by the updated bulletin.

The Department's former policy was to treat optional maintenance and optional warranty contracts the same, imposing tax on the sale of either type of contract when it contained a right to have tangible personal property and there was a reasonable expectation that property would be provided under the contract.

The updated bulletin outlines the following state policies:

Redefines warranty contracts to distinguish them from maintenance contracts

Specifically states that the substance of the contract overrules its given title

Reiterates its policy that maintenance contracts are taxable at the time of sale when it is expected that more than a de minimis amount of tangible personal property will be transferred during the term of the contract

Establishes that contract sales meeting the definition of warranty are not taxable transactions

Optional Maintenance Contracts

Maintenance contracts include agreements where, at the time the contract is entered into, tangible personal property is expected to be supplied during the term of the contract. The Department's position per the updated bulletin is that these contracts are taxable bundled transactions unless the tangible personal property component is de minimis (i.e., makes up less than 10 percent of the total value of the transaction). This de minimis test would appear to require parties to quantify the anticipated breakdown between tangible personal property and services at the time the contract is entered into in order to establish whether or not the transaction is taxable. Taxpayers selling taxable maintenance contracts do not pay sales tax on their purchases of items used to fulfill their obligations under the contract.

Optional Warranty Contracts

A warranty contract is defined as "a contract that acts like insurance against future potential repair costs," and consists of agreements where there may never be any tangible personal property or services provided to the customer. The Department's new position per the updated bulletin is that sales of optional warranty contracts are not taxable because it cannot be determined at the time the contract is entered into whether tangible personal property will be transferred. The warranty provider must pay sales or use tax on all purchases of items used to fulfill its obligations under the contract.

The bulletin is silent as to how the Department will treat taxpayers that observed the policies detailed in the information bulletin prior to its issuance. Because the changes articulated in the bulletin are not the result of a law change, taxpayers that have retroactive exposure as a result of the old policies may have newfound support for their position as a result of this revised information bulletin being issued.